Dollar falls vs. yen, stable against euro

Yen gains before Bank of Japan meeting

DeborahLevine

WilliamL. Watts

NEW YORK (MarketWatch) — The U.S. dollar fell against the Japanese yen on Thursday, a day before the Bank of Japan is expected to expand its own asset-buying program.

The greenback also slipped versus the euro, erasing a gain after a steeper-than-forecast fall in a key euro-zone sentiment gauge.

The ICE dollar index
DXY, +0.54%
which measures the greenback against a basket of six currencies, traded at 78.920, down from 79.072 in late North American trading on Wednesday.

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Against the Japanese yen, the dollar
USDJPY, +0.98%
fell to 80.94 yen, from ¥81.45 in late trading Wednesday.

The Bank of Japan meets on Friday and is expected to increase monetary stimulus for the second time this year, said Kathy Lien, director of currency research at GFT.

Asset purchases may be increased by ¥5 trillion to ¥10 trillion, with the greater amount being more bearish for the yen, according to analysts.

Based on the price action of dollar-yen, “it appears that investors expect a more modest increase,” Lien said.

However, over the longer term, Japan’s efforts to weaken its own currency haven’t worked, in large part because of dynamics elsewhere in the world, such as the debt crisis in Europe and the Fed’s overwhelming bond purchases.

“It is hard to find evidence of sustained yen weakness on Bank of Japan asset purchases,” said Elsa Lignos, senior currency strategist at RBC Capital Markets. The program was introduced in October 2010, expanded just after the March 2011 earthquake and again in August and October of last year, she said.

Yet in 2010, the dollar fell 12.9% against the yen, followed by a 5.1% decline in 2011.

“The only time an announced expansion has coincided with yen weakness has been post Feb. 14 of this year, when arguably the back-up in U.S. Treasury [yields] was much more instrumental in driving dollar-yen up,” Lignos said.

On Thursday, Treasury yields fell back toward their lowest levels in several weeks, which tends to correlate with the dollar appearing less attractive to Japanese investors. Read about Treasury yields.

“U.S. Treasury yields are broadly lower which is weighing on the dollar-yen,” said Eric Viloria, senior currency strategist at Forex.com. He also noted that besides expanding its asset purchases, the Bank of Japan could extend the maturities of its purchases or raise the 1% inflation target — already way above the inflation rate in Japan — to combat deflation.

So far this year, the yen is declining. The dollar has gained 5.3% versus Japan’s currency and the euro is up about 7.6%.

Euro sentiment

The euro
EURUSD, -0.6970%
traded at $1.3243, compared with $1.3220 on Wednesday.

The European Commission said its April economic sentiment indicator for the 17-nation euro area fell to 92.8 from a reading of 94.5 the previous month. Economists had forecast a reading of 94.2.

“Poor European news today is helping the greenback stabilize and the euro was unable to break strong resistance near the $1.325 level,” said currency strategists at Brown Brothers Harriman.

A softer tone for the dollar was set Wednesday after the Federal Reserve kept interest rates on hold and Fed Chairman Ben Bernanke said he remained willing to buy more bonds should the economy need help. Read story on dollar, Fed.

The dollar remained under pressure on Thursday after data showed U.S. initial jobless claims were little changed in the latest week, while many economists expected a decline. Read story on jobless claims.

The British pound
GBPUSD, -0.0397%
rose 0.1% to $1.6192, following a volatile session on Wednesday after data showed the U.K. officially fell back into recession.

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